When market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market, fixed-interest payments declines, so the market value of the investment falls. How would that drop in fair value be reflected in the investment account for a security classified as HTM? Would your answer change if the drop in fair value was due to worsened financial conditions at the investee?

When market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market, fixed-interest payments declines, so the market value of the investment falls. How would that drop in fair value be reflected in the investment account for a security classified as HTM? Would your answer change if the drop in fair value was due to worsened financial conditions at the investee?

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

ChapterA2: Investments

Section: Chapter Questions

Problem 3MCQ

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When market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market,fixed-interest payments declines, so the market value of the investment falls. On the other hand, if market ratesof interest fall after a fixed-rate security is purchased, the fixed-interest payments become relatively attractive,and the market value of the investment rises. Assuming these price changes are not viewed as giving rise to another-than-temporary impairment, how are they reflected in the investment account for a security classified asheld-to-maturity?
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